Baidu Drops 4%, Troubles Priced In?

By Ben Levisohn

We believe the new products around non-web search channels could help the company go after share of wallet of large advertisers, especially in this difficult macro environment. Over the last couple of quarters, Baidu’s large advertiser’s segment has been stagnant as average revenue per customer was trending down Y/Y for 4Q12 and 1Q13…

…Trading at roughly 14x of our 2014 EPS estimates, we believe worst case scenarios (desktop search market share loss, gap between mobile traffic and monetization, and margin pressure due to investment) have been priced in to shares. Longer term, we remain positive on BIDU, and we reiterate our secular long rate and price target of $115 (18x our 2014 EPS estimate).

While investors once fretted about the impact of competition from Qihoo 360 Technology (QIHU) and others, China’s slowing economy is what worries Pacific Crest’s Evan Wilson. He cut his forecast for Baidu’s operating margin due to spending on mobile and video, and his revenue and earnings-per-share targets on “macroeconomic uncertainty.”

We view 2013 as a transition and investment year for Baidu. While we still see long-term value in Baidu, uncertain macroeconomic conditions and increasing investments in mobile and video prompt a reduction in estimates. Due to these factors, we also expect choppy results from Baidu in the near term.

Shares of Baidu have dropped 3.8% to $89.57 today. They’re down 11% this year.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.